Dash for cash: companies draw $124bn from credit lines

The shelves normally filled with paper products at Albertsons supermarkets are now emptied mid-morning as consumers across the United States stock rolls of toilet paper.

This is not the kind of challenge that the Boise, Idaho-based retailer will face this year. Albertsons executives had focused on an IPO that would see the shares of the Cerberus-backed group listed on the New York Stock Exchange alongside top-notch names such as American Express and Johnson & Johnson.

They revealed their plans for an IPO on March 6, but less than a week later, managing director Vivek Sankaran and his team hired their Bank of America bankers for an entirely different purpose.

With the uncertainty triggered by the coronavirus crisis, Albertsons wanted money, and a lot. As of March 18, he had used a line of credit for 2 billion dollars. He could ask for more in the days to come.

In the past three weeks, more than 130 companies in Europe and the Americas have withdrawn at least $ 124.1 billion from their lenders, according to analysis of information published by the Financial Times and people informed of the activity. . The actual figure is likely to be much higher, as listed companies are not required to immediately report direct debits, and private groups often have no obligation to report them.

In the days when the world was inundated with cash, lenders were offering low-cost revolving credit facilities – similar to a credit card – as an advantage in earning other business. The banks believed that most would never be used in full; that was the stigma of the big companies that designed them.

But credit is now more difficult to find. The US $ 10 billion corporate bond market, where investors had avidly used the weakest corporate debt offers, is now reserved for the more well-known and financially strong – like Walt Disney, Coca-Cola and UPS. The short-term commercial paper market has also been frozen, requiring Federal Reserve emergency surgery.

During this crisis, companies such as Norwegian Cruise Line and Hilton Worldwide, who have been hit hard by the fallout from the global health pandemic, with customers canceling their trips. But almost all the other industries followed. The automaker Ford borrowed $ 15.4 billion and announced that it would shut down its factories to save money; the Anheuser-Busch InBev brewer raised $ 9 billion as the faucets stopped flowing; and TJX and Kohl’s, owner of TJ Maxx, each made $ 1 billion by closing stores.

“The economy is really suffering. It has hit an iceberg and no one is quite sure how long it will last, ”said Carlos Hernandez, executive chairman of the global investment bank at JPMorgan Chase. “It is not unreasonable to assume that more companies will draw their lines.”

Hernandez’s bank received more line of credit calls than any other, the FT analysis showed. JPMorgan had nearly $ 367 billion in undrawn commitments to businesses at the end of last year, more than 13% of its $ 2.7 billion balance sheet.

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Bank of America, Citigroup and Wells Fargo together provided $ 1.2 billion in additional lines, while Morgan Stanley and Goldman Sachs held a total of $ 260 billion, according to recent documents filed with US securities regulators.

This reflects the fact that banks remain “the primary source of liquidity assurance” for American businesses, according to Sascha Steffen, professor at the Frankfurt School of Finance, and Viral Acharya of NYU, who studied nearly $ 1 billion in unused credit lines owned by more than 2,400 American groups. This became clear when the market collapse started on February 21 and the corporate bond, loan and equity markets all intensified.

“I can’t remember such a crazy or stressful week – I feel like I haven’t left the phone since 5 am. [last] Monday, “said Scott Barshay, corporate lawyer with Paul Weiss. “Unlike September 11 or the financial crisis of 2008 and 2009, this is a crisis for businesses in all sectors of the economy – everyone is grappling with how to make business decisions when most businesses are closed and you don’t know when they’ll come back. “

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Some companies, such as Albertsons, have used their lines of credit to provide enough cash as their operations progressed. Several large groups, including the manufacturer Oreo Mondelez International, established new lines of credit in the event of worsening financing markets. Other companies, more stressed, pulled out in anticipation of the breach of covenants, which would allow lenders to cut cash.

“The speed at which businesses are already withdrawing lines of credit is faster than what we have seen before,” said Mr. Steffen. If credit markets become even more difficult, drawdowns could accelerate, he added.

The biggest financiers warn that cracks are already starting to form in the business world and that the worst is yet to come. Analysts at the credit rating agency S&P Global have been working around the clock, downgrading 121 companies and warning against the prospects of 176 other groups in part due to the global health pandemic. Rivals at Moody’s estimates that $ 235 billion in debt is due this year and needs to be repaid or refinanced, and an additional $ 345 billion is due in 2021. Rising borrowing costs will weigh on businesses’ finances after a period where multinationals have gone into debt and defaults are expected to arise.

The owner of the New York Sports Club is one of the groups that has already encountered problems. The indebted gym operator, known as Town Sports, warned late Friday that he might not be in operation in a year because he faces the threat of a wave of cancellations linked to the coronavirus epidemic. He is already trying to get his owners to agree to reduce the rents. He drew $ 12.5 million from his line of credit.

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“We have never been in an environment where revenues are zero,” said Bruce Mendelsohn, who heads restructuring consultancy for boutique investment bank Perella Weinberg Partners. “It’s a major paradigm shift. We help all kinds of companies, especially in terms of access to capital: credit lines, revolvers, etc.

“I was present during the stock market crash of 1987, I experienced the Internet bubble, then September 11 and more recently the financial crisis of 2008. It could be much more devastating,” added Mr. Mendelsohn.

For private groups, the same pressure is exerted. In Silicon Valley, New Enterprise Associates, one of the world’s largest venture capital firms, with investments in Gwyneth Paltrow’s Goop lifestyle brand and Coursera online education platform, urged companies that it supports considering other financing strategies, in particular by seeking to use their credit lines, according to a presentation reviewed by the FT.

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In private equity, some companies in the Blackstone and Carlyle portfolio were encouraged to draw down their credit lines to avoid a credit crunch, according to people familiar with the discussions.

So far, the banking system has been able to cope with the pressure of the torrent of capital demands, even though loan officers and bankers process them from their homes. Senior executives at several of the largest banks have told the FT that they can write checks, even if 100% of their undrawn lines are called. Even if this turns out to be the case, it could have an impact on other loans. , especially if fears mount over the ability of companies to repay their credit lines.

“Banks have the capacity to respond to these drawdowns, but that takes away their ability to lend in other areas,” said Bradley Rogoff, a credit strategist at Barclays. “The risk is that if the bank capital is constrained by revolvers. then they cannot lend. They have the capital, but they can no longer do anything with it. “

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